Investment and expertise helping companies capitalise on innovation

CRAIG JOHNSON

Innovations can come in all shapes and sizes. For some companies, it’s all about latching on to an idea from the research and development (R&D) department and turning it into a new product or service that will disrupt or revolutionise a market. For others, it’s about taking an existing customer favourite and making it even better, forging strides that will keep clients satisfied.

For Andy Gregory, regional director at BGF (Business Growth Fund), innovation is about more than simply products or processes. “When we invest in innovative and entrepreneurial companies, we’re looking at more than the financial figures on their own – we’re looking at the people behind the innovation,” explains Gregory, a chartered accountant with 20 years of experience in private equity, acquisition finance and corporate finance with companies including Bridgepoint, ISIS equity Partners, Key Capital Partners, and Royal Bank Development Capital.

“Having a great idea is the ideal start for a growing business that’s ready to move on to the next stage of its development. But if the right team isn’t in place to allow that company to fulfil its potential then even the best idea can fall flat on its face.”

Established in 2011 with up to £2.5 billion to invest, BGF is now the UK’s most active provider of growth capital to small and mid-sized companies.

BGF makes initial investments between £2 million and £10m into a business, and can provide additional funding to support growth. The companies it backs are privately-owned or listed on the Alternative Investment Market (AIM) and typically have revenues of between £5m and £100m.

“BGF was set up to provide a new type of funding – one that differed from traditional private equity and offered an alternative to debt,” says Gregory. “We are long-term, minority funding partners, which means that owner-managers remain in control of their businesses.

“But one of the things we hear from even the most seasoned entrepreneurs is that one of their biggest challenges is getting access to support and guidance. That’s where our network comes into play.

“We have a group of more than 2,000 board-level contacts spread throughout the UK who are prepared to share their wisdom and experience with the companies in which we invest.

“Sometimes members of our network will even become chairmen or non-executive directors to help steer management teams if they decide they need further advice and expertise, or take on more specialist roles like that of the financial director.”

When the right innovation and the right team come together, the results can be outstanding.

BGF initially invested £3.85m in Glasgow-based photonics technology company M Squared Lasers in April 2012, helping the company to grow its international sales, especially in the United States.

M Squared is a leading force in the laser and photonics market, a sector experiencing dramatic growth in valuations and primed to be worth billions of pounds within the next decade.

The company develops a range of laser systems for scientific researchers, supplying world-leading research institutions such as Birmingham, Cambridge, Glasgow and Oxford

universities in the UK and Harvard, Stanford and the Massachusetts Institute of Technology (MIT) in the United States.

It also partners with research bodies globally to develop novel light-based applications that have the potential to tackle global problems Graeme Malcolm and Gareth Maker, who founded M Squared Lasers in 2006, have a fine track record when it comes to innovation.

They launched Microlase in 1992 as a spinout from Strathclyde University and sold it in 2000 to Nasdaq-listed Coherent.

BGF followed up its initial investment in the pair’s latest venture with a further £750,000 last year, alongside a £2.5m finance package from Barclays, to help the company capitalise on opportunities in its target markets.

M Squared isn’t the only BGF portfolio company that’s reaping the benefits of its innovations.

Glasgow-based ACS Clothing – which hires out formalwear through retailers including Burton, Debenhams and Slaters – received an initial investment of £8.5m from the fund in January 2014, enabling it to develop its Xedo Software business and prepare for expansion in the US.

A further £8.8m was pumped into the company last September to stoke the American growth. Chief executive Richard Freedman, who founded the business in 1997 with his father, Joe, has steered innovation at the company, using software for bookings and to control its massive

warehouses near Glasgow and Memphis.

Working with BGF, Freedman brought in Teresa Robson-Capps – former deputy head of HSBC Direct Bank and executive at retailers including Asda, GUS, Sears, and Whitbread – as his chair, utilising her “quiet authority and experience” to complement his drive and ambition.

Another company that has benefited from both initial and follow-on investments from the fund is Aberdeenshire-based oil and gas pipeline engineering specialist Stats Group.

The first investment of £7.8m in March 2012 helped the company to double its turnover to around £30m, with a second tranche of £4.3m in January 2015 designed to fuel further international expansion.

Stats was founded in 1998 by chief executive Peter Duguid and his sister, Lorraine Porter. One of the innovations that sets the company apart is its patented Bisep intervention and isolation technology that provides the safest double block and bleed isolation of high pressure

hydrocarbon pipelines in the market.

Fellow North-east oil and gas industry supplier Aubin used a £2.25m cash injection from BGF in February 2013 to fuel further innovation. The company supplies specialist chemicals and the investment from BGF, along with a £500,000 debt facility provided by Bank of Scotland through the UK Government’s Funding for Lending scheme, has allowed it to develop its patented gels.

Founded in 1986, Aubin’s raft of clients in the Middle east has helped it to weather the drop in the price of oil, while BGF helped it to appoint industry veteran Graham Philip as its chairman. At Aubin, around a quarter of chief executive Paddy Collins’s staff work on R&D, a considerable investment for a small company and proof of the way in which it places innovation at the heart of its business.

“What all of these companies have in common is that they combine market leading innovations with world-class management teams,” adds Gregory.

“Having the right combination of innovation and expertise means that growth capital can help

businesses to reach their full potential.”

Leading the way

Few terms are bandied about more than “innovation”. But what does Business Growth Fund (BGF) classify as innovation?

“For me, innovation isn’t just about incremental improvements,” says BGF’s Andy Gregory. “It’s not enough to just take baby steps – innovation is either about taking an existing product or service and revolutionising it, or it’s about creating something completely new that’s going to disrupt the marketplace.

“When it comes to disruption, your company needs to get there first. There are few prizes for coming in second.”

History is littered with inventors and companies that have taken those steps. Inventions like the lightbulb or wifi have disrupted not just their own sectors but the entire sphere of consumer behaviour.

When it comes to revolutionising an existing product, then technology enthusiasts need look no further than Apple’s iPhone. While mobile phones had already become a must-have gadget, Apple took a simple tool and turned it into a highly-designed piece of consumer electronics and further boosted the never-ending craze for smartphones.

It’s not all about products either. When it comes to services, having a Blockbuster video rental card in your purse or wallet was an important part of Saturday night entertainment in the 1980s and 1990s. But then LoveFilm took the service off the high street and into a mail-order format, with online services like Netflix now streaming content that used to arrive through your letterbox.

“There’s a quote from Apple co-founder Steve Jobs that always sticks in my head,” adds Gregory. “Jobs said that innovation is what ‘distinguishes between a leader and a follower’ – wise words when you think about the people behind the innovations.”

This article appears in the Summer 2016 edition of Vision Scotland. An online version can be read here. Further information about Vision Scotland here.

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